Created in January 2004 as part of the Medicare prescription reform law, health savings accounts (HSAs) are sometimes referred to as medical IRAs. These plans are increasingly popular and, according to a May 2005 study by American Health Insurance Plans, more than one million people are now covered under HSA-based health plans.Many insurance companies, local banks, as well as specialized administrators offer HSAs, but be advised, the fees charged to run these plans vary widely. For an online list of the top ten most affordable providers, go to www.hsafinder.com/07-05_1.shtml

How do they work?Like IRAs, individuals contribute pre-tax dollars into accounts that are tied to a wide range of investment vehicles (savings accounts, mutual funds or, in some cases, stocks). These accounts can accrue interest and roll over any unused balances to the next year, unlike standard Section 125 or “cafeteria” medical benefits plans. These funds can be withdrawn from the HSA at any time, without penalty, to pay for legitimate medical expenses not typically covered by the insurer, such as office visit and prescription drug co-payments, vision expenses, and dental work. To see a list of federally approved expenses, go to www.irs.gov/pub/irs-pdf/p502.pdf

An important note: HSAs can only be used in conjunction with health-insurance policies that have steep annual deductibles—between $1,000 and $5,000 for individuals, or $2,000 and $10,000 for families—but these plans typically cover 100% of expenses once this limit has been met.

Who should look into HSAs?Those who are self-employed and have been unable to previously afford health insurance will find that high-deductible, HSA-based plans offer significantly lower premiums, and are therefore more accessible, than most HMO and PPO plans. According to HSAFinder.com, a free informational website on HSAs, the average individual who chooses a high-deductible, HSA-based plan over more traditional health care coverage would save an average of $840 during the first year.

Likewise, small business owners who already provide their employees health care, but have seen their premiums skyrocket over past few years, could realize annual savings of between 20% and 60% by switching their employees to a shared-cost HSA-based system. For those businesses that have never been able to afford offering medical coverage to their employees, HSA-based health plans offer a low-cost method of adding health insurance to their company’s benefit package.

What are the costs?The high-deductible health plans (HDHPs) that partner with an HSA have premiums that range from $200 to $300 a month, or $2,400 to $3,600 a year, based on the number of dependents. Annual HSA contributions are currently capped at $2,650 for individuals and $5,250 for families. So, a family with high-end premiums that also uses their fully funded HSA to completely pay off their deductible would spend $8,850 for medical expenses in one year. This amount compares favorably to family health insurance costs using more standard health plans, which, according to the Kaiser Foundation, averaged $9,068 in 2003.

What are the advantages?For employees and self-employed entrepreneurs, individually owned HDHP/HSAs offer complete portability of their health plans from job to job with no interruption in care. During periods of unemployment or low cash flow, HSAs can also be tapped to pay for monthly medical premiums in addition to routine health expenses. And because the individual, rather than the insurance company, owns the HSA, the funds can be saved up and used for other long-term, medical expenses as well as passed onto a spouse tax-free after death.

What are the drawbacks?From the insured’s perspective, funding a HSA may not be feasible because it requires a sizeable amount of liquidity to be effective. Additionally, the federal government has currently capped HSA contributions near the low end of the allowable deductible range, meaning there is still some risk of significant out-of-pocket health care expenditures. Finally, small business owners who force their workers to shift from a HMO or PPO-based plan to a HDHP/HSA without sharing the premium pay-ins risk being accused of cost shifting, which could alienate workers and erode morale.

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